Banks running amok in NZ with interest only loans yet no NZ probe?
Interest-only mortgages touted to families who want a baby and a house
Rob Stock
10 May 2017
Heavily indebted young families struggling to cope when baby comes are helping cement the popularity of interest-only home loans.
Interest-only mortgages were once considered the territory of property investors banking on capital gains, and an eventual sale, to repay their loans.
But Reserve Bank figures show 16 per cent of owner-occupier home loans, or $26.5 billion of loans, were on interest-only terms at the end of February with the borrowers making no progress in paying off the money owed to the bank.
The rise of interest-only home loans has authorities around the world worrying, with Australian regulator ASIC concerned that around 40 per cent of total home loan lending is in interest-only loans.
READ MORE:
* No justification for interest-only mortgages http://www.stuff.co.nz/business/82302584/no-justification-for-interestonly-mortgages
* Westpac slashes interest-only home loans terms http://www.stuff.co.nz/business/industries/82009447/westpac-slashes-interestonly-home-loans-terms
* Interest-only mortgage 'irresponsible' http://www.stuff.co.nz/business/money/63014826/Interest-only-mortgage-irresponsible
* No NZ probe into interest-only loans http://www.stuff.co.nz/business/money/64014671/no-nz-probe-into-interestonly-loans
There are many reasons why owner-occupiers opt for an interest-only home loan for a period of time, instead of traditional "principal and interest" loans, where they gradually chip away at the amount they owe.
Banks say one of the most common is when couples are struggling to cope with going down to one income when a child is born.
When a couple applies for a mortgage, a bank ask how many children they have as well as their income in calculating what it is willing to lend them.
ANZ's mortgage calculator indicates a childless couple earning $120,000 combined before tax, and running two vehicles, could borrow up to $772,000, with repayments of around $4500 a month.
But fast forward two years to the birth of a first child, and the temporary loss of one income, and the couple would no longer qualify for the same size home loan, and coping with repayments on their existing loan becomes much harder.
ANZ's calculator suggests it would lend up to $461,000 to a couple with a combined income of $80,000, one vehicle, and one child with repayments of around $2700 a month.
It's at this stage in a life that mortgage brokers and mothering websites suggest families go interest-only until the child is old enough to be popped into day care, and the mother return to work.
Squirrel Mortgages says: "Provided you own more than 20 per cent of your home, you can... put your mortgage onto interest-only for a while. This will reduce repayments to cover any shortfall."
And Kidspot.co.nz says: "In the months after baby arrives, it might be worth considering switching to interest-only home loan repayments, if you need to tighten your purse strings."
Both advise people planning to start a family to learn to economise as soon as possible, and to repay as much debt as they can, before their first baby arrives.
The government-funded financial Sorted.org.nz warns people that going interest-only can end up costing homeowners more in the long run, and to keep the interest-only period as short as they possibly can.
It's not only cash-strapped young families who banks allow to go interest-only.
People struggling to make repayments sometimes do so as a means of coping with financial hardship, perhaps after a job loss, until they get back on a solid footing, or sell their home at the urging of the bank.
"Generally interest-only table loans are appropriate when providing financial solutions to customers with temporary or longer-term debt servicing difficulties," says Kiwibank spokesman Bruce Thompson.
"This may be a change of circumstances such as having a baby or starting a business, its generally
when a borrower's income decreases rather than their debt increasing."
Sometimes borrowers have better, higher-return uses for their money than repaying the mortgage,
such as starting a business.
Another situation where interest-only periods are used is when a homeowner is borrowing to renovate
their home, and plans to switch back to principal and interest payments afterwards, says mortgage
broker Cambell Hastie.
BNZ spokeswoman Janine Ogier says: " The most common reasons tend to relate to bridging finance,
or through the building stage of a new house."
Some people, like salesmen on lumpy commission income, use interest-only loans help with cash-flow management, says Westpac spokeswoman Hilary Marett, but they rarely put the entire loan on interest-only.
A borrower might use an interest-only loan alongside a revolving credit loan allowing them to make
principal repayments when they have the money, while not doing so in leaner months.
"For people with lumpy or inconsistent levels of income such as contractors or the self-employed, smaller regular interest-only payments are often preferred," ANZ spokeswoman Emma Mellow says.
"They still have the ability to make lump sum principal repayments from time to time."
Some owner-occupiers may also be among the 130,000 or so property investors, and are intending to pay off their home loans using capital gains on the sale of a rental property, Hastie says.
"Use of interest-only periods is more common amongst property investors," says Ogier.
Banks deny first home buyers can use interest-only loans to keep repayments down so they can buy a
home they couldn't afford on a principal and interest loan.